China’s growth prospects continue to be a hot topic in discussions on the health of the global economy. It’s easy to be caught up in the bearish sentiment on China, given recent events. And especially given the systemic risks to the world economy that a China slowdown poses. But here is my take on what is likely driving this sentiment:
- China’s Shanghai and Shenzhen stock market crash that began in July affected more than just the few. Even though some analysts have argued that the stock market isn’t linked too heavily into the broader economy, it is much more linked that is immediately obvious. Chinese authorities had been doing a lot to encourage greater retail investment in stocks, including providing concessionary credit. Yes it was an inevitable bubble, but a bubble that encompassed a lot more people than just the elite wealthy few. So, to be worried about the effects of the crash would be justified. Yes it is the correction of a bubble, but it also has ‘negative wealth effects’ for a wider segment of the population. (Read here for a basic explanation of ‘wealth effects’)
- The sudden Yuan depreciation by Peoples Bank of China (PBoC) worried investors and analysts about China’s growth, as it indicated concern on the part of Chinese authorities on the country’s export performance and weaknesses in some key markets in the West. It also came on the back of disappointing factory activity data (manufacturing) in August (Ciaxin Purchasing Managers Index – PMI). This may change with next weeks expected release of the latest PMI data.
- The full effect of China’s economic rebalancing is not yet known. China’s government led by Xi Jinxing and Li Keqiang have embarked on a potentially tricky, but essential, rebalancing away from investment-led growth to consumption-led growth. It is unclear whether this would lead to a ‘hard landing’ or whether China can manage it smoothly. See here for something I wrote a couple of years ago on ‘dragon-slaying’ or ‘panda-hugging’. Yet, some recent measures indicate that a nervous Chinese state is not backing away from public investment completely. Local Government Financing Vehicles (LGFVs), which are economic entities established at the local government level to finance public investments, have been direct beneficiaries of the recent round of stimulus measures.
- An issue connected to this rebalancing (away from investment and infrastructure-led growth) is the substantial slow down in the real estate industry. Projects have slowed, news constructions have slowed, returns on new projects are lower, and many projects remain unfinished leaving large ‘ghost towns’ of unfinished condominium complexes. But it appears that some of the latest stimulus measures are aimed at stemming this tide – China lowered the mortgage down payment for first time home buyers in order to stimulate the property market.
- The clamp down on corruption has slowed somethings down. The current Chinese regime’s singular focus on combating corruption in the government and public-private dealings (some argue some of it is politically motivated, but that is a different story altogether) has been having an impact on infrastructure projects and also interactions between government and business. There is some sense that this is affecting the real economy. Some investments that had been forged before are now taking a wait and see approach. Public officials don’t want to go out of their way facilitating private investment projects either, in some instances, as they become over cautious.
Yet, as I have argued in the past, both here, and here, China’s medium to longer-term prospects appear bright. However, it may be a few years before many of us can be truly convinced of it. In an insightful interview, two Deutsche Bank economists argued that many are too bearish about China, and the current signs are just symptoms of a transitionary phase in China – especially as the Chinese authorities get used to managing an evolved economy.
However, it may be a few years before many of us can be truly convinced of it.
(updated 13th & 15th October. Image courtesy Reuters)